Many fintech stocks lost their luster over the past year as inflation, high interest rates, and other macro headwinds throttled the industry's growth. Intense competition across the market also made it difficult for smaller players to scale up their businesses and improve margins.
However, that sell-off might represent a good buying opportunity for investors who can tune out the near-term noise and plan to hold the investments for at least a few more years. Two of those fallen fintech stocks are Upstart (UPST 1.76%) and Affirm (AFRM +0.81%), which have dropped about 90% and 60% from their all-time highs, respectively.
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What do Upstart and Affirm do?
Upstart operates an AI-powered online lending marketplace that approves loans for banks, credit unions, and auto dealerships. Instead of analyzing a potential borrower's credit score or annual income, Upstart's platform aggregates non-traditional data points -- including previous jobs, standardized test scores, and GPAs -- to reach a broader range of customers. It generates most of its revenue by taking a small referral fee on each approved loan. It has originated more than $50.4 billion in loans from over 100 banks for at least 3 million customers.
NASDAQ: UPST
Key Data Points
Affirm provides buy now, pay later (BNPL) services to younger, lower-income consumers who don't use traditional credit cards. It doesn't charge compound interest or any hidden fees on those "microloans," which are typically split into four or more recurring payments. It also attracts cost-conscious merchants, as its costs are usually lower than credit card swipe fees. As of its latest quarter, it served 24.1 million active consumers and 419,000 active merchants.
NASDAQ: AFRM
Key Data Points
Why are Upstart and Affirm great investments?
Upstart and Affirm both struggled as interest rates rose and the macro headwinds intensified. Yet both companies will continue to expand if interest rates keep declining.
From 2025 to 2027, analysts expect Upstart's revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow at CAGRs of 20% and 35%, respectively. From fiscal 2025 (which ended last June) to fiscal 2028, they expect Affirm's revenue and adjusted EBITDA to increase at CAGRs of 25% and 125%, respectively.
With an enterprise value of $4.6 billion, Upstart trades at just 13 times next year's adjusted EBITDA. Affirm, which is valued at $24.7 billion, trades at just 16 times next year's adjusted EBITDA. Both stocks look undervalued relative to their growth potential, likely because the near-term macro headwinds are driving cautious investors away from fintech stocks. However, I believe they'll rebound and command higher valuations again as those headwinds dissipate.
